In bankruptcy, the assets of the debtor vest in a bankruptcy trustee. In receivership proceedings or winding-up proceedings, the assets remain
vested in the debtor but a receiver or administrator obtains control over the management of the business. Restructuring proceedings in Canada diverge from both of these models in that the debtor retains both ownership and control of the business assets. The debtor therefore has the ability to operate the business while the restructuring proceedings are under way.
In order to create an environment in which negotiation with creditors is facilitated, it is necessary to impose a stay of proceedings on the creditors and prevent them from engaging in manoeuvres during this period that would give them an advantage over other creditors. This prevents creditors from seizing assets or otherwise enforcing their claims against the debtor’s assets. Unlike bankruptcy, the stay of proceedings applies to both secured and unsecured creditors. The stay also prevents legal actions from being commenced or continued. This permits the managers of the firm to direct their undiverted attention to the restructuring attempt.
Although creditors are prevented from enforcing their claims against the business assets or from wresting managerial control from the existing managers, this alone is not enough to maintain the business as a going concern while the restructuring plan is being developed. Because the debtor continues to operate the business, it is necessary to distinguish between pre-filing and post-filing creditors.
The plan that will be negotiated and voted on affects only the pre-filing creditors - i.e., creditors who were owed obligations on or before the date that restructuring proceedings were commenced. Post-filing creditors expect to receive full payment of their claims. They will often refuse to extend any further credit, and suppliers will frequently insist on being paid cash on delivery. The insolvent business also is faced with the prospect of paying sizeable fees to insolvency professionals and lawyers. The obligations incurred by the enterprise following the initiation of restructuring proceedings must be paid, and a source of interim financing is needed in order to meet these interim expenses. In addition, performance of contractual obligations incurred by the enterprise prior to the initiation of the proceedings may impair the ability of the enterprise to restructure successfully. Restructuring law provides mechanisms by...